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Fee Claims Allowed in Federal Court

A decision was overturned earlier this month in the lawsuit Green v. Fund Asset Management, in which shareholders in seven Merrill Lynch funds have sued the company for engaging in fraud with regard to management fees.

The original decision, entered in the U.S. District Court for New Jersey, granted a motion by the defendants which contends that the plaintiff's state claims could not be heard in federal court. On March 16, the U.S. Court of Appeals for the 3rd Circuit reversed the decision allowing the state claims to be heard in the federal case. That could prove significant for fund firms if claims from states with stricter fraud standards are brought into federal court.

In the complaint, filed in 1998, plaintiffs contend that the defendants "failed to explicitly or sufficiently disclose" that the calculation of the management fee in seven Merrill Lynch funds would include assets purchased with the proceeds from the sale of preferred stock, according to the March decision.

"[The plaintiffs] claim that because the advisory fee is measured as a percentage of the Funds' capitalization, including leverage, there is a strong financial incentive for [the company] to keep the Funds fully leveraged at all times, even when it would be in the best interest of shareholders to reduce or eliminate leverage," according to the decision.

Therefore, the plaintiffs maintain that the fee arrangement creates an inherent conflict of interest, which was not disclosed in the funds' prospectuses, the funds' filings with the SEC, or the funds' periodic reports to the shareholders, according to the decision.

The funds named in the case are: MuniEnhanced Fund, the MuniVest Fund II, the MuniYield Fund, the MuniYield Insured Fund, the MuniYield Insured Fund II, the MuniYield Quality Fund, and the MuniYield Quality Fund II. Among the individuals at Merrill Lynch named as defendants is Terry Glenn, who is the executive vice president of each of the funds and is acting chairperson of the Investment Company Institute of Washington, D.C.